ES

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2007, for Northeast Utilities (NU) and its subsidiaries: The Connecticut Light and Power Company (CL&P), Public Service Company of New Hampshire (PSNH), and Western Massachusetts Electric Company (WMECO). The company operates primarily as a regulated utility providing electric and gas distribution, transmission, and generation services in Connecticut, Massachusetts, and New Hampshire. NU Enterprises, the competitive energy segment, is in the process of winding down remaining wholesale contracts and energy services activities following the divestiture of its retail marketing and competitive generation businesses in 2006.

Key Financial Metrics (Nine Months Ended Sept 30, 2007)

Material Changes vs. Prior Period

• Revenue Decline: Operating revenues decreased by $854 million (16%) compared to the first nine months of 2006. This was primarily driven by a $634 million reduction in NU Enterprises revenues due to the exit from competitive businesses and a $220 million decrease in regulated company revenues due to lower pass-through costs (specifically Federally Mandated Congestion Costs and energy supply costs) recovered from customers.
• Profitability Increase: Despite lower revenues, Net Income increased by $50 million (41%). This improvement is largely attributed to the absence of significant losses in NU Enterprises' retail marketing business (which was sold in 2006) and lower fuel costs at regulated utilities. The 2006 period included a one-time $74 million tax benefit at CL&P which is not present in 2007; excluding this, non-GAAP earnings increased significantly.
• Cash Flow Volatility: Operating cash flows dropped significantly to $68.2 million from $380.3 million in the prior year. This decline was primarily due to a $398.5 million payment of federal and state income taxes in Q1 2007 related to the 2006 sale of the competitive generation business. Excluding these tax payments, operating cash flows actually improved to $466.7 million.
• Capital Investment: Cash capital expenditures increased by $150 million to $750.2 million, driven by accelerated transmission infrastructure projects, particularly at CL&P in Connecticut.

Guidance, Outlook, and Risks

• Earnings Guidance: NU raised its 2007 full-year earnings guidance to $1.45 to $1.60 per share (previously $1.30 to $1.55). For 2008, the company projects earnings of $1.65 to $1.95 per share.
• Long-Term Growth: The company projects a compounded annual EPS growth rate of 10% to 14% from 2008 through 2012, assuming regulatory approvals for capital investments. Transmission segment earnings are expected to comprise approximately 50% of total earnings by 2012.
• Capital Plan: NU projects approximately $6 billion in capital expenditures from 2008 through 2012, with a projected rate base growth from $5.4 billion (end of 2007) to $9.4 billion (end of 2012).
• Key Risks and Contingencies:
  • Regulatory: Pending rate case decisions for CL&P (draft decision expected Dec 2007) and WMECO. FERC is reviewing transmission return on equity (ROE) calculations, potentially requiring additional refunds of approximately $3.4 million pre-tax.
  • Legal: Ongoing litigation with Consolidated Edison, Inc. regarding a failed 1999 merger agreement. Con Edison claims damages of at least $314 million; NU claims costs of approximately $32 million.
  • Environmental: Potential additional remediation costs at a Holyoke Water Power Company (HWP) river site in Massachusetts. Current reserve is $0.6 million, but future costs could be material.
  • Market Risk: NU Enterprises holds remaining wholesale derivative contracts with a net fair value liability of $94.7 million. Mark-to-market fluctuations on these contracts impact earnings.

Investor Verification Checklist

• Tax Payment Impact: Verify the one-time nature of the $398.5 million tax payment that depressed Q1-Q3 2007 operating cash flows and confirm the timing of future tax obligations.
• Regulatory Rate Cases: Monitor the outcome of the CL&P distribution rate case (decision expected Dec 2007) and the FERC transmission ROE compliance filing, as these directly impact future revenue recovery and earnings.
• NU Enterprises Wind-Down: Track the exit strategy and mark-to-market volatility of the remaining wholesale contracts (currently a $94.7 million liability) and the timeline for their expiration.
• Capital Expenditure Execution: Assess the progress and cost overruns of major transmission projects, specifically the Middletown to Norwalk project and the Springfield 115 KV Cables project, which are critical to the 2008-2012 growth projections.
• Legal Exposure: Review updates on the Con Edison merger litigation and the NRG Energy arbitration regarding station service billings.